Wednesday, November 05, 2008

Health Insurance, Healthcare, and Policy

Someone recently asked me that if she should pick the PPO, the HMO, or stay with Kaiser. This was someone in great health, so the answer for maximum cost savings would be to go with Kaiser. But health in general isn't that easy, because tragedy can strike at any time, and you won't know when. For instance, if you were diagnosed with Cancer, and the best chance of providing a recovery was to go with this great doctor that an expert pointed you at, and he didn't work for Kaiser, what would you do? Would you say, "Forget it," and stick with Kaiser's doctors? Or would you pony up the several hundred thousand dollars and just do whatever it takes? If you had substantial assets (a good health insurance plan would cover up to about $6 million in life time costs), then you would probably do that, but most of us don't have $6 million sitting around in a bank in case of a health emergency, which is why I've always opted for a PPO when given a choice --- it usually costs quite a bit more, but I don't buy insurance for routine doctor visits, the cold, or even an extensive physical (which can run up to about $600 or so). I buy health insurance because I can't afford $6 million if I need a transplant or whatever, and in those catastrophic instances, I want to be able to see whatever doctor that will give me the best chance of survival.

Someone asked in a mailing list recently what makes health insurance special? I'll try to explain, but I don't really expect to persuade any Libertarians or Republicans. My experience is that those people aren't persuadable by logic or examples from other countries, so if you're one of those, don't bother posting on the comments --- I'll be ruthless in moderating and deleting comments even before they show up on the blog.

The big issue with health insurance is Adverse Selection. The way I like to explain is to imagine that you're the CEO of a health insurance company like Cigna, Blue Shield, or Pacific Care. Your job is to maximize profits. Now, whenever someone applies for health insurance, they have a chance of costing you more than the premium he's likely to pay. Now, if you reject all such candidates and only accept healthy people, then you'll be more profitable. In fact, the best thing you can do is to send such candidates to your competitors, because it makes them less profitable. So now you know why health insurance companies make you fill out all sorts of forms and have their doctors look at you to determine whether you're a good health risk. Note that even if you were a good-hearted CEO and wanted to insure all comers, you couldn't, because if you tried to do so, what would happen is this: all the people with health problems will come to your company to buy insurance because your policies cost less for them. That will drive up your costs, because those people cost more to insure. As a result, your insurance will cost more than your competitors and this will lead to a death spiral as all your healthy customers migrate to all your competitors, which will make your business more and more untenable.

Now, those of you with good middle class jobs will raise their hands and say, but wait, this doesn't happen to me. I have good health insurance through my job, despite my pre-existing conditions. That's because employers (especially large ones) can say to multiple insurance companies: "Hey, I've got a big group here. You either cover all of them, or I'll go to someone else. You can't take just my healthy employees --- you've got to take my unhealthy ones too." So what happens is that within a company, the healthier people subsidize the less healthy ones. This is as it should be, since even if your name is Lance Armstrong, there's no guarantee you won't come down with testicular cancer next year and need expensive treatment while in your 20s. If you're a really big company with large profits, you can go one step further and self-insure, and pay an insurance company only to deal with the paper-work, since that's how the medical industry does this.

The obvious next step then, is to put the entire population of a country into one big group, and have the country as a whole self-insure. This is how most major industrialized countries do it. Now you have a really big insurance pool, and you can insure everyone pretty cheaply! Now, if you've swallowed the Republican/Libertarian line about how the government is naturally wasteful, you'd be skeptical about this working out, and you'd be wrong. The government doesn't have to give its civil servants corporate jets, nor does it have an incentive to spend lots of time in court denying health-care claims to its citizens. So it can spend much more on health-care than on overhead. Note that the private insurance system has a built-in incentive to deny coverage whenever possible --- that savings go straight to the bottom-line of the insurance company. At the very least, politicians who want your vote have to keep you alive in order to get it, so this is definitely one case where the health insurance that covers everyone (through say, payroll taxes) at least does away with one perverse incentive.

Here's another interesting incentive change: preventive medicine is a lot cheaper than fixing up an illness. It's cheaper to treat hypertension and high blood pressure than to treat a heart attack. The private insurance system does not have an incentive to do preventive medicine in a country where people move around frequently and hence have to switch health insurance companies every so often. Because a government run system has to bear the costs of a heart attack no matter where someone moves to, there's a lot more incentive to do preventive medicine and keep people healthy. This is well documented in the veteran's health administration, where an aggressive approach towards preventive medicine has reduced their costs significantly.

What about all those famous waiting periods that the right-wingers love to talk about? Canada and Britain are especially famous in those examples. Well, take a look at the first table in this paper. In 1997, the UK spent 6% of GDP on healthcare. The Canadians spent 9%. The US, 14%. One system that's well-known for not having a ton of waiting periods is the French system (which is an interesting private/public system). They spent 9.6% of GDP on healthcare. I'm pretty sure that if the US spent 12% (instead of 14%) of GDP on healthcare and made it efficient (which isn't hard, since we already know that medicare/veterans administration can approach the efficiencies we find in other countries), we'll have an excellent system that costs less, and has much fewer waiting periods than the UK system or the Canadian ones.

Now, I don't think this is going to happen by any stretch of the imagination. But Obama's proposal, as far as it goes isn't that bad. It has a few properties:

  1. Community rating. This means that insurance companies have to take all comers. They can't deny coverage to anyone because of pre-existing conditions or health, or they won't be allowed to do business at all. This is huge! (For one thing, it'll mean that I can get health insurance)
  2. Competition from the public sector. If all the health insurance companies in your area suck, it's not a catastrophe. You'll get a chance to buy into the same insurance system Congress-critters voted for themselves. This is a big pool, because it includes all government employees, so it'll be reasonably efficient. In fact, most health policy experts expect that eventually, private companies will find themselves unable to compete with the government system and cease to exist. (After all, CEOs don't like it when they can't have corporate jets)
  3. No mandate. Now this is a problem. It creates a moral hazard, in that if you're healthy, you have no incentive to join the insurance pool and help subsidize all the unhealthy people like me. This is even more true if (as anticipated) you can sign up for health insurance after you got hit by a bus or some other health catastrophe, and still get the same cheap coverage that you could have gotten if you signed up while healthy. This particular feature came up for debate during the primary, and I expect it to be debated if Obama does try to live up to his promise of improving health insurance coverage for American citizens (and if he doesn't, I'll be first in line to vilify him). I expect that some sort of mandate will become necessary, and I'll be happy to have it deducted from payroll --- that's how companies do it nowadays anyway, so I don't anticipate any changes.


At this point, I'm sure the Republicans and Libertarians who've bothered to read this far are shaking their heads, convinced that the country will go to hell in a hand-basket. I'll strongly disagree --- I think Universal Healthcare will actually help the economy a ton. Think of all the startups that could happen because people who would otherwise stick around in a safe job at a big company would suddenly feel free to start their own things since the specter of not being able to get healthcare will no longer be hanging over them. People who've wanted to work for themselves and become consultants would be willing to take the jump and do so. With cheaper healthcare (because of greater efficiencies in covering everyone), even old-line industries like car manufacturers (which have been squeezed because they compete with other countries like Japan where everyone does get into the universal healthcare systems) will benefit. I think this policy, enacted properly (and an Obama administration that was competent could do this) has the potential to make our economy even more dynamic than it is, and that's a good thing, even if all you care about is your bottom line.

Hopefully, if you've read this far, you'll feel like you've learned something about why Paul Krugman, Gene Spurling, and many others are hoping that Obama takes this golden opportunity to really deal with healthcare, and that we'll be extremely disappointed if he fails. I'll take reasonable comments and questions and do my best to answer them, but note that this blog has moderated comments turned on, and if you're going to be abusive or not add value to the discussion your comment won't show up.
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